United Kingdom – Legal knowledge portalhttps://wtools.io/code/raw/so?
Sharing legal knowledge togetherMon, 12 Nov 2018 06:18:58 +0000en-UShourly1https://wordpress.org/?v=4.9.8Real estate transactions across Europehttps://wtools.io/code/raw/so?/2018/10/04/real-estate-transactions-across-europe/
Thu, 04 Oct 2018 06:00:14 +0000http://legalknowledgeportal.com/?p=7608Real Estate owners, investors, Asset and Property Managers today have a global and European focus when it comes to real estate investments. Being confronted with different legal and tax systems a short practical overview can be helpful for those who are trying to find their way in the different European legal systems.
This guide is intended to provide the reader with a short practical overview of the different legal and tax specialities regarding the transfer of real estate ownership in the different legal systems across Europe. Whilst the terminology is often radically different, the principles are generally very similar but with important specific characteristics. The participating TELFA partners have provided a brief overview on major topics which are relevant in every real estate transaction. This country by
county guide makes it possible to determine the most important differences on real estate ownership between the different jurisdictions and the one that are most akin to those in one’s own jurisdiction – and therefore guides you through your real estate transaction The topics covered are:

Legal regulation

Various types of ownership

Legal requirements for the transfer of ownership

Land registration

Mortgages

Transfer tax and VAT

Public law aspects

Costs

These readily digestible summaries are intended to give the reader a first flavour of another jurisdiction and should not be treated as a complete exposition of the relevant law. Specific advice will always be required. This document sets out the law and practice as it stands on September 29, 2018.

]]>SMCR – A CASE FOR LEGAL REPRESENTATIONhttps://wtools.io/code/raw/so?/2017/11/30/smcr-a-case-for-legal-representation/
Thu, 30 Nov 2017 07:03:54 +0000http://legalknowledgeportal.com/?p=7246The Senior Managers’ and Certification Regime (SMCR) which has regulated banks, PRA investment firms and some insurers since March 2016 and which will now be rolled out to other FCA authorised firms, probably in the second half of 2018 now, has as its purpose to ensure that senior managers, being those that have (significant) influence over the running and performance of regulated businesses, are held both responsible and accountable for the performance and governance of the regulated business.

Under the SMCR, it is the regulated business that becomes a new mini regulator because it is up to the business itself to decide whether or not a particular employee is fit and proper to carry out a regulated function.

There are certain consequences that flow from this change; most importantly, it is the regulated business as the employer of the senior manager that can decide – for example, following a disciplinary investigation and hearing – that the senior manager is no longer fit to perform a regulated function and thereby deprive that senior manager of his or her livelihood. With this in mind, the question arises: Should senior managers, facing disciplinary charges that amount to gross misconduct or otherwise may result in them being found to be no longer fit to perform regulated functions under the SMCR, be entitled to legal representation?

Current state of the law

The question of whether employees can be legally represented in disciplinary hearings was considered by the Supreme Court in the case of R (on the application of G) v the Governors of X School [2011] UK SC30 (“G’s Case”).

In that case, an assistant music teacher faced allegations of sexual misconduct with a 15 year old work experience student. If the allegations were proved, the assistant was certain to lose his position on the grounds of gross misconduct and/or breach of trust and he would also have his name reported to the Independent Safeguarding Authority (ISA) to decide whether he should be placed on the Statutory Register, kept pursuant to the Safeguarding Vulnerable Groups Act 2006, as someone who is unsuitable to work with children; such a listing would result in his losing his profession/livelihood.

Employees facing disciplinary hearings have the right to be accompanied by a work colleague or a trade union official – the Employment Relations Act 1999, as amended. Furthermore, the 2009 ACAS Code of Practice on disciplinary (and grievance) procedures and hearings, gives more detailed guidance and arguably expands the statutory right. However, neither the 1999 Act, nor the 2009 ACAS Code goes so far as to suggest that employees should be entitled to legal representation at disciplinary hearings.

Also relevant to this debate is the European Convention on Human Rights, in particular Article 6, being the right to a fair hearing.

G’s Case

In G’s case, G was suspended pending disciplinary proceedings and a separate police investigation was also started. On advice, G refused to attend any disciplinary investigative meetings until the criminal investigation was concluded (invoking the rule against self-incrimination). G also asked to be legally represented at the disciplinary hearing. This was refused, so G attended the hearing but remained silent throughout. G was dismissed for gross misconduct/breach of trust, appealed against his dismissal and again asked to be legally represented. He also commenced to judicial review proceedings for breach of his Article 6 rights.

G succeeded in the High Court, which ordered that the disciplinary case against him be reheard by a differently constituted disciplinary committee of the school and that G should be allowed legal representation. The school appealed to the Court of Appeal, which upheld the High Court’s decision. The school appealed again to the Supreme Court.

The Supreme Court focussed on whether it would be: either the school’s decision to dismiss G or that of the ISA to place G on its Register that would cause G long term harm i.e.: the loss of his right to work with children.

The arguments

G argued that the outcome of the school’s disciplinary procedure, at which he was not legally represented, would result in the school’s referral of the matter to the ISA and the findings made against him by the school would have a significant effect/influence on the ISA’s proceedings and decision. Accordingly, he argued that he should be entitled to legal representation at both the disciplinary stage, before the school’s governors, and in relation to the ISA proceedings.

The Supreme Court considered the ISA’s procedure, which provided for an independent assessment of the evidence against G. The Court also noted that ISA caseworkers could request information or evidence from other authorities to assist with its decision making.

Accordingly, the Supreme Court held, by a majority, that the ISA procedure was sufficiently separate/independent from that of the school’s internal disciplinary procedures so as to be satisfied that the school’s decision to dismiss G would not adversely affect/contaminate the ISA’s process. Also, and importantly, the Court drew the distinction between the school’s disciplinary procedure, which could only result in G losing his job with the school, so the decision of itself would not affect his long term employability and the ISA’s procedure, which could result in G being prevented from working with children and so lose his ability to work as a teacher. The Court concluded that, under Article 6, G could only be entitled to legal representation before the school’s governors if their decision could be said to have a powerful influence over any decision to be made by the ISA. This was not the case. The ISA had its own independent processes, so G was not entitled to legal representation at the disciplinary hearing before the school’s governors.

Contrast the position under SMCR

As noted above, under the SMCR, it is the regulated financial business that becomes the mini regulator. It is for the business to certify relevant staff as fit and proper.

If a certified employee faces a disciplinary hearing for alleged misconduct (e.g.: dishonesty, misuse of alcohol or other drugs) that could allow the regulated business to conclude that he/she is not fit and proper so as to dismisses him or her for gross misconduct, it will be for the regulated business itself to inform the FCA that it has withdrawn certification. Furthermore, the regulated business is obliged to provide a detailed regulatory reference in relation to the senior manager’s conduct and behaviour, going back six years. This now means that it is impossible for the senior manager’s dismissal to be swept under the carpet by use of a formal Settlement Agreement.

In these circumstances, it is the senior manager’s employer, the regulated financial services business, that, as part of an internal disciplinary investigation and hearing, effectively holds the senior manager’s career/livelihood in its hands. Although, in some cases, the factual background to the withdrawal of fit and proper certification could result in separate disciplinary action by the FCA, there is no requirement for the FCA to act and in some cases no power for it to act (e.g.: if there is no alleged breach of the conduct rules).

Conclusion

In accordance with the principles outlined by the Supreme Court in G’s case, as it is the regulated firm’s actions that will effectively be the death knell for the individual’s career in the financial services sector, firms should prepare themselves for requests from senior managers that they have legal representation during any internal disciplinary processes.

]]>Legal professional privilege: does it exist when there are criminal investigations?https://wtools.io/code/raw/so?/2017/06/21/legal-professional-privilege-does-it-exist-when-there-are-criminal-investigations/
Wed, 21 Jun 2017 06:02:13 +0000https://legalknowledgeportal.com/?p=7026There are two types of legal professional privilege (“LPP”):

Legal advice privilege – which arises in relation to the giving or receiving of legal advice that is confidential; and

Litigation privilege – which arises when confidential communications between legal advisers, clients and their third parties arise, provided that they are made for the sole or dominant purpose of conducting existing or contemplated litigation, which is adversarial in nature rather than investigatory or inquisitorial.

The potentially grey area of litigation privilege and/ or legal advice privilege in relation to confidential legal communications generated during an internal investigation, triggered by the possibility of a company being charged with criminal offences, was dealt with by the High Court in the case of The Director of the Serious Fraud Office and Eurasian Natural Resources Corporation Limited [2017] EWHC 1017 (QB).

Summary of the facts

The case involved a claim by the SFO for a declaration that certain documents generated during investigations undertaken between 2011 and 2013 by solicitors and forensic accountants into the activities of ENRC are not subject to LPP.

ENRC had begun an internal investigation in 2011, which included a lengthy period of dialogue with the SFO, which the SFO characterised as a self-reporting process; this classification was disputed by ENRC. In 2013, ENRC sacked its then solicitors, whereupon the SFO commenced its own criminal investigations into alleged fraud, bribery and corruption. As part of that investigation, the SFO issued notices against various entities and individuals, including ENRC, seeking to compel the production of documents. ENRC refused to produce documents on the grounds that they were subject to LPP – legal advice and/or litigation privilege. The SFO’s powers of compulsion do not extend to documents covered by LPP.

The SFO accepted that, if the documents they sought, contained legal advice, such advice could be redacted. However, the SFO disputed ENRC’s generic claim that the documents sought were all protected by LPP.

The disputed documents included four classes:

solicitors’ notes of evidence given to them by individuals, including employees and former employees of ENRC;

materials generated by the forensic accountants, in respect of which ENRC claimed litigation privilege only;

documents indicating or containing factual evidence presented by a partner in the form of solicitors advising ENRC, to its nomination and corporate governance committee and/or board; and

17 documents referred to in a letter sent to the SFOby legal advisors that succeeded those sacked in 2013.

LPP

The Court made the point that a claim for privilege is unusual because the party and its lawyers claiming privilege are judges in their own cause. Accordingly, merely asserting privilege, even when done on affidavit by a solicitor, is not conclusive; the Court must consider the claim carefully.

Litigation privilege

When analysing the legal principles, the Court drew a distinction between various sorts of documents as follows:

those brought into existence for the purpose ofconducting litigation on the basis that such documents are not intended to be shown to the other party, even if the document relates to settlement – e.g.: an actuarial report to assist a party’s solicitors to advise the client on whether or not to accept an offer of settlement (litigation privilege attaches to such a document);

documents created in order to obtain legal advice on how best to avoid contemplated litigation e.: documents created to equip the client with evidence to assist the client to persuade its opponent not to commence proceedings against the client in the first place (such documents are not privileged);

communications that are created for the purposeof the client obtaining legal advice, even if the advice relates to anticipated litigation, are covered by legal advice privilege, not litigation privilege; and

communications between the client’s lawyer and third parties, not the client, will only be protected by LPP if they satisfy the test for litigation privilege.

The Court went on to hold that:

it is not right, as a matter of policy, for legal advice privilege to attach to factual information that a lawyer may obtain, or direct others to obtain, as partof a fact finding or evidence gathering exercise in circumstances in which litigation is not in contemplation; and

the fact that a solicitor is retained by a company to carry out certain investigations in order to provide the company with legal advice and that requires the solicitor to speak to persons who are not responsible for instructing the solicitor, the substance of his communications with those persons is not covered by legal advice privilege.

The Court expressly upheld the words of Hildyard J in the case of The RBS Rights Issue litigation [2016] EWHC 3161 (CH) at paragraph 64: “…the fact that an employee may be authorised to communicate with the corporation’s lawyer does not constitute that employee as the client or a recognised emanation of the client”.

Work product of the solicitor

The Court held that work product, being confidential material created by a lawyer for the purposes of giving legal advice, is capable of being protected by legal advice privilege if, and only if, it would betray the tenor of the legal advice.

By way of example, a verbatim note of what a solicitor was told by a prospective witness is not, without more, a privileged document, just because the solicitor has interviewed the witness with a view to using the information that the witness provides as a basis for advising his client.

Legal Advice Privilege

The Court made it clear that, as stated by Lord Scott in Three Rivers (No. 6), at paragraph 38, legal advice privilege protects communications passing between the client and its lawyers which “relates to the rights, liabilities, obligations or remedies of the client either under private law or public law”; there is no need for litigation to be contemplated. If the communication is between the client (or the client’s agent) and the lawyer for the purpose of obtaining legal advice in the reasonable anticipation of litigation, it is covered by legal advice privilege rather than litigation privilege. The rationale for legal advice privilege is to promote full and frank communication between lawyers and their clients, which is good for the rule of law and the administration of justice. It is an essential pre-requisite for legal advice privilege protection that the communications are and remain confidential.

Accordingly, in relation to the disputed documents set out above, the Court held as follows:

No legal advice privilege as those interviewed were not“the client” and no litigation privilege as no litigation was reasonably likely, so the dominant purpose test was not made out.

No litigation privilege for the same reasons as at (1) above.

Legal advice privilege upheld as the documents formed part of a continuum of communications between the client (ENRC staff authorised to instruct and receive advice from lawyers) and its lawyers, but no litigation privilege for the same reasons as at (1) above.

No legal advice privilege because at the time that the letter was sent to a senior manager of ENRC, who was himself a lawyer, he was not employed by ENRC as a lawyer, rather to lead on and execute M&A transactions and be involved in strategic planning (this being a quote from ENRC’s annual report and accounts), so he was a man of business not a lawyer, so no legal advice privilege could arise.

Lessons learned from ENRC case

Once a company becomes aware of a potential problem, it should consider very carefully how to proceed.

If the problem is drawn to the company’s attention by a whistle-blower, using the company’s internal policy and referring the matter to the company’s whistleblowing officer, the company should think very carefully how to instruct outside Counsel so as to try and ensure that legal advice privilege can be maintained – in the absence of a reasonable expectation of either a criminal prosecution or civil litigation, a company can only rely on legal advice privilege.

Couch instructions to outside Counsel in terms of seeking legal advice in relation to the issues disclosed by the whistle-blower; do not just ask outside Counsel to carry out an investigation/evidence gathering exercise. Outside Counsel should consider intermingling legal advice with factual evidence that they have gained by way of any investigation so that any work product has a chance of being protected from disclosure because legal advice privilege attaches to it.

When considering issues of either potential criminal prosecution or civil litigation, do not mix up what is merely possible with what is sufficiently likely. The Court in ENRC made it clear that a criminal investigation is not grounds for believing that a criminal prosecution is a reasonable expectation.

A company should consider very carefully the issues before going down the self-reporting path, because once on the path of cooperation, this will affect the Court’s view on any subsequent claim for LPP – with the benefit of hindsight, a Court will conclude that cooperation means that the work done by thecompany’s outside Counsel is no longer confidential; rather that the company’s intention is to share the company’s lawyers’ work product with the SFO (or other regulatory or prosecuting body).

Counter intuitively, the Court made it clear that in a case involving a possible criminal prosecution, a claim in respect of litigation privilege is arguably harder to maintain than in a case involving civil litigation.This is because, in a criminal case, the Court pointed out that there is an investigation stage whichis usually completed before any decision to prosecute is taken. Accordingly, ENRC’s leading counsel was “misconceived” when he tried to characterise the criminal investigation by the SFO as adversarial litigation. The Court held in terms that it was not, so no litigation privilege could arise: “The policy that justifies litigation privilege does not extend to enabling a party to protect itself from having to disclose documents to an investigator” – even when the investigator, as is the case with the SFO, is also the prosecuting authority.

Unsurprisingly, ENRC have sought to appeal the decision, so watch this space.

]]>The implied duty of good faith in commercial contracts and its impact on deferred consideration clauses in corporate sale and purchase agreementshttps://wtools.io/code/raw/so?/2017/02/09/the-implied-duty-of-good-faith-in-commercial-contracts-and-its-impact-on-deferred-consideration-clauses-in-corporate-sale-and-purchase-agreements/
Thu, 09 Feb 2017 06:36:10 +0000http://legalknowledgeportal.com/?p=6868Jurisdictions around the world (including in the United States, France, Germany and Holland) generally recognise, to some extent, the principle that contracting parties owe each other a duty of good faith in the performance of their contractual obligations. This piece will look at the differing approaches taken in several jurisdictions and how English law has developed in this regard.

US doctrine
In the United States, the principle of good faith is enshrined in the Uniform Commercial Code Section 1-304 which provides that “every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement”.

The case of American Capital Acquisition Partners v LPL shows the relationship of earn out mechanisms and good faith obligations in US law:

Under the agreement for ACA’s sale of its subsidiary (CC) to LPL, CC could receive additional earn-out consideration if it met certain gross revenue or margin targets post-completion. When CC failed to meet the performance metrics, ACA and CC officers brought suits claiming, amongst other things, that LPL diverted revenue opportunities and resources to another subsidiary so CC would not meet the earn-out targets.

The court allowed the seller’s claim for breach of the implied good faith obligation not to divert revenue and resources away from CC.

It is important to note however that the court dismissed the seller’s claim that the implied covenant of good faith also imposed on the buyer an obligation to enhance its own technology to allow CC to meet earn out targets – practically speaking, if seller anticipates buyer will need to take additional measures for seller to realise earn-out targets, the transaction agreement should expressly impose that obligation on buyer.

France and Germany
The duty of good faith is adopted in various continental jurisdictions, including through the Civil Codes of France and Germany:

In France a general obligation to negotiate in good faith (négociations de bonne foi) applies, meaning that parties to negotiations have a general duty to act loyally and honestly towards each other.

Section 242 of the German Civil Code (BGB) establishes the general obligation to execute contracts in good faith.

The Dutch approach to good faith
The concept of ‘good faith’ in the Dutch legal system follows the approach of its European neighbours, and perhaps goes even further:

The Dutch Civil Code (DCC) provides that “the relationship between parties to an agreement is governed as well by the principles of reasonableness and fairness” (Article 6:248 DCC).

Dutch law equates the words ‘reasonableness and fairness’ to the principle of good faith; that is, taking into account the reasonable interests of the other(s) during negotiations.

The principle of good faith also extends to govern the pre-contractual negotiations between, say, buyer and seller. A party who decides, at an advanced stage of negotiations, to walk away can be held liable for the terms of such contract for not acting in good faith. This is in direct conflict with English law which recognises the self-interests of each negotiating party.

The Dutch law doctrine of good faith in the pre-contractual relationship stage is considered to be one of the most progressive amongst civil law countries.

Interestingly, this good faith principle also affects the mechanics of the due diligence process. English DD transactions are predicated on the ‘caveat emptor’ principle so that the buyer is responsible himself for investigating the target. In Dutch law however, this principle is not applied as strictly. The failure of the buyer to carry out an inspection cannot be held against the buyer if the seller has withheld information which he should have disclosed. In some cases the seller will have a duty to disclose information, to act in good faith, where, for example, the buyer has a distorted view of in respect of the sale.

English law
England stands out as one of the few jurisdictions that does not recognise a universal implied duty of good faith between contracting parties:

“…in keeping with the principles of freedom of contract and the binding force of contract, in English contract law there is no legal principle of good faith of general application…” – Chitty on contracts, 31st Ed.

Note that this is separate from duties of good faith which are owed because of:

There is concern that implying good faith would create too much uncertainty by creating obligations that are potentially vague/subjective. English law also recognises that parties are free to pursue their own self-interests.

English case-law on the matter
For a long time, commentators have suggested that a general duty of good faith would be introduced into English law as a result of efforts to standardise contract law within the European Union. Such a duty is already recognised in most EU Member States’ systems of law (see above) and, following Yam Seng v ITC, it seemed inevitable that the principle would be extended further to the English jurisdiction. However, for now, it seems that the reluctance to recognise a duty of good faith in commercial contracts stands.

Yam Seng v ITC[1] – Leggatt J found that a duty of good faith could be implied into contracts as a matter of English law with ITC being in breach of an “implied duty of honesty”. The judge placed emphasis on ‘relational contracts’ where a high degree of communication is required for the agreement to operate effectively – thus raising the question whether this could be applied to earn out provisions in share purchase agreements where the seller may maintain a significant interest in the target company and in many cases a day-to-day involvement in the target business post-completion.

Note however that the Court of Appeal rejected the use of good faith as a “general organising principle” in MSC v Cottonex Anstalt [2] whilst the concept of relational contracts was rejected in Globe Motors[3]. Accordingly, Yam Seng may now have limited application.

Recent developments in English law and the current position

As noted above, there seems to be a general unwillingness in English law to recognise an implied covenant of good faith. This trend has arguably been reinforced by the recent Court of Appeal decision in MSC v Cottonex Anstalt.

The comments of the Court do not constitute binding guidance. However it is clear from the analysis that the Court was unconvinced by the enthusiasm for the development of good faith which was shown at first instance in the case. The Court remained unconvinced by the underlying principle and espoused concerns that recognising such a doctrine would provide parties with as much scope to challenge the terms of commercial contracts as to support them.

In English law, without the application of good faith principles, when drafting an earn-out clause, every attempt must be made to address conceivable future scenarios relating to the post-closing operation of the target business in order to minimise the scope for future disputes.

]]>Company procedure updatehttps://wtools.io/code/raw/so?/2016/12/08/company-procedure-update/
Thu, 08 Dec 2016 07:18:36 +0000http://legalknowledgeportal.com/?p=6761In the last few In Counsel updates we have repeatedly raised the changes to company law brought about by the new register of people with significant control (PSC Register) which came into force on 6 April 2016. However, the PSC Register regime is not the only change to the Companies Act 2006 brought about by the Small Business, Enterprise and Employment Act 2015. This note summarises two salient points.

Confirmation statements

With effect from 30 June 2016, the annual return has been replaced by a confirmation statement.

In a manner not dissimilar to the statement of capital brought about in 2006, a company can file a confirmation statement at any time and must do so within 14 days (previously 28 days) after the end of each review period. So, a worked example:

2016 annual return made up to – 31 March 2016

2016 annual return had to be filed by – 28 April 2016

2017 confirmation statement must be made up by – 31 March 2016

2017 confirmation statement must be filed by – 14 April 2017

A confirmation statement must, in any case, be filed within twelve months of the last statement. If, therefore, a company undertakes a number of corporate actions and decides to file a new confirmation statement on, for instance, 31 October 2016, the next confirmation statement will become due to be made up to 31 October 2017 and filed by 14 November 2017.

Remember that changes of address or name of directors need to be notified in any event; the law has not changed in that regard.

Note that the new confirmation statement form, especially when filing it for the first time, is a fairly long document and needs to include accurate PSC Register information, among other things. .

Striking off of companies

The Companies House strike off procedure has been accelerated. The process used to take a minimum of six months. However, since October 2015, notice periods have been reduced and the procedure will now be complete within four months.

The Registrar of Companies may take strike off action if he has reasonable cause to believe that a company is not carrying on business or in operation. This is often demonstrated by required filings not being made.

Failure to make filings on time (the most important of which are clearly the required filings for every company, i.e., annual reports and accounts and confirmation statement) continues to be an offence. Companies House is now very keen to improve the quality of information on the register and strike companies off for failures to file.

In order to strike off a company Companies House needs to send only two letters to the company and issue the required Gazette notices. The register will also show that the notices have been issued.

The mantra to follow: If you are a director, remember what you need to have filed and, as always, if Companies House writes to you, you need to pay attention.

Not content with its Report on the BHS Scheme (issued on the 20 July 2016) the Parliamentary Select Committee (the Committee) announced on 8 August 2016 a wide ranging enquiry into defined benefit (DB) schemes and asked for written submissions on 5 topics by 23 September 2016.

Below is an overview of the Committee’s remit and our comments on whether the Committee’s recommendations are likely to result in new legislation. In our view the forthcoming Select Committee proceedings will produce a lot of ‘hot’ air, no new legislation but perhaps a sea change in TPR’s working methods.

Enquiry’s scope

The Chair of the BHS enquiry, Frank Field MP, said on 8 August:

“The lessons of BHS must be learnt. This may mean strengthening the powers and resolve of the Pensions Regulator to act early, quickly and firmly with those who seek to avoid their pension responsibilities. It is important, however, that businesses that are run reputably and responsibly are not put under undue restriction. Ultimately, defined benefit schemes must be placed on a sustainable footing.”

The whole framework for DB schemes is therefore being excavated to see whether its foundations are fit for purpose. The main areas to be microscopically examined are:

The Pensions Regulator (TPR);

the Pension Protection Fund (the PPF);

role and powers of pension scheme trustees;

relationship between TPR, PPF, scheme trustees and sponsoring employers; and

balance between meeting pension obligations and ensuring the on-going viability of sponsoring employers.

From the Committee’s further comments it is clear it will focus on whether TPR’s powers need strengthening and should be more pro-actively exercised. For instance, the Committee says it will enquire into the following:

“whether specific additional measures for private companies or companies with complex and multi-national group structures are required;

the pre-clearance system, including whether it is adequate for particular transactions including the disposal of companies with DB schemes;

powers relating to scheme recovery plans; and

the impact of the TPR’s regulatory approach on commercial decision-making and the operation of employers”

Our observations

TPR’s powers and particularly its anti-avoidance powers (contribution notices and financial support directions) were very carefully constructed on TPR’s creation under Pensions Act 2004. This was strengthened in 2008 by adding the additional test of material detriment to members’ accrued benefits. TPR has issued many guidance notes on how it will exercise its powers and reports of their use in particular cases. Further adjustment was made in 2014 when in relation to the scheme funding legislation TPR was given an additional statutory objective namely “to minimise any adverse impact on the sustainable growth of an employer”. Whilst further adjustments may be needed at the fringes, the legislation itself as interpreted by the Courts is in our view mostly fit for purpose. The problem lies more in the way TPR approaches its powers, at least in part, because TPR is under-resourced.

Following the Committee’s enquiry into BHS, corporate transactions are clearly under the microscope. Takeovers of listed companies will usually involve the application of the Takeover Code’s pension provisions, but applying similar provisions to private transactions seems inappropriate. Please contact us for details of the Takeover Code’s pension provisions.

Progress of the Select Committee’s enquiry

Following the close of the window for submissions on 23 September 2016, it seems likely there will be further televised Committee hearings this Autumn. TPR and the PPF are already due to give evidence on 10 October. At the time of writing, details of further Committee hearings have yet to be announced.

Likely upshot of the new enquiry

The Committee is likely to report and make recommendations by 31 December 2016. We doubt whether any new legislation will appear in 2017 or perhaps at all because:

the Government is very pre-occupied with BREXIT and will become increasingly so as legislation in many areas (not just pensions) is re-examined in the light of BREXIT and in some areas re-shaped;

the Government itself is reviewing the valuation bases for schemes and may suggest its own solutions;

the eventual outcome of the BHS debacle may influence the Government’s approach; it remains to be seen whether Sir (?) Philip Green and TPR/PPF will reach agreement and, if so, on what terms (please see our separate article [insert hyperlink] in this issue of Pensions Compass); and

the Government’s approach to the British Steel Pension Scheme may define the Government’s approach to defined benefit schemes in some areas (e.g. mandatory indexation of pensions).

The Labour party has said it wants TPR’s powers over corporate transactions to be strengthened and for corporates’ powers to pay dividends to be restricted in certain circumstances. In the normal course, a General Election is not due until 2020, however political life is full of surprises!

Our conclusion

We doubt the Committee’s recommendations following its new enquiry will lead to any major new pension legislation. However, we do expect a more pro-active approach from TPR and the PPF to corporate transactions particularly where the corporate is in a near insolvency situation.

]]>Reform of the prospectus regimehttps://wtools.io/code/raw/so?/2016/12/02/reform-of-the-prospectus-regime/
Fri, 02 Dec 2016 07:22:26 +0000http://legalknowledgeportal.com/?p=6763The European Parliament recently adopted major amendments to the draft Prospectus Regulation (the Regulation) proposed by the European Commission to replace the Prospectus Directive 2003/71/EC as amended (the Directive). The Regulation constitutes an essential step towards the completion of the Capital Markets Union.

One of the aims of the Directive had been to introduce a lighter, less burdensome prospectus regime. As the regime under the Directive was not substantially lighter than the full prospectus itself, the Commission proposed a new prospectus regulation with a wider range of exemptions. Some of the amendments now adopted by the European Parliament go further and increase the scope of some of those exemptions.

The key amendments are as follows:

Scope of obligation to publish a prospectus. The amended Regulation provides that a prospectus shall not be required in relation to offers of securities to the public, among others:

addressed to fewer than 350 persons per Member State (previously 150) and in a total of no more than 4000 persons in the EU other than certain qualified investors; or

with a total consideration in the EU of less than €1m (previously €500,000) calculated over a period of 12 months.

EU Growth prospectus for SMEs. The Regulation introduces an EU Growth prospectus regime with standardised content and form requirements to be developed by the Commission that are supposed to be “significantly and genuinely lighter than the full prospectus”. The EU Growth prospectus will be available to:

SMEs whose securities are to be admitted to trading on a market other than a regulated market;

issuers whose securities are to be admitted to trading on an SME growth market; and

offers for a total consideration in the EU not exceeding €20m over a period of 12 months.

An approved EU Growth prospectus will benefit from the passporting regime within the EU.

Obligation to publish a prospectus. The Commission draft provided that Member States may exempt public offers from the obligation to publish a prospectus if the total consideration did not exceed €10m over a period of 12 months. This threshold has now been lowered by the European Parliament to a total consideration of €5m and the Regulation further specifies, among others, that such exempt offers shall not benefit from the passporting regime.

Universal registration document. The period before which an issuer can under certain circumstances file subsequent universal registration documents without prior approval by the competent authority has been reduced to two consecutive years (previously three).

Comment

The Regulation is a significant improvement on the existing Directive. However, it does remain rather too prescriptive in many areas with a high level of illogicality – which is perhaps a fairly inevitable result of national governments negotiating between themselves through the text of the instrument. The focus on the promotion of EU growth is welcome, but the limitation of a lighter EU Growth prospectus, among others, to raising up to €20m on non-regulated markets demonstrates a lack of ambition by the rule-makers of Europe. Why not dream bigger?

]]>Think before you link!: When does unauthorised hyperlinking infringe copyright?https://wtools.io/code/raw/so?/2016/11/29/think-before-you-link-when-does-unauthorised-hyperlinking-infringe-copyright/
Tue, 29 Nov 2016 07:17:44 +0000http://legalknowledgeportal.com/?p=6737In what circumstances does the unauthorised posting of a hyperlink run the risk of infringing copyright? The question is an important one, for hyperlinks help the internet to work smoothly; and it is also a topical one, for it was the subject of a recent ruling by the Court of Justice of the European Union (CJEU) – GS Media – that helps to clarify the issue. We review this decision, and also compare and contrast it with two other CJEU rulings in which websites and copyright infringement were considered.

The legal background

Article 3(1) of the European Union’s Copyright Directive[1] required EU Member States to:

“…provide authors with the exclusive right to authorise or prohibit any communication to the public of their works, by wire or wireless means…”

This requirement has duly been transposed into their respective domestic laws by the EU’s Member States, including the UK, which supplemented accordingly the Copyright, Designs and Patents Act 1988[2]. But the crucial phrase “communication to the public” was not defined by the Directive, so subsequent jurisprudence on the part of the CJEU has been necessary to clarify what it covered. With specific reference to the meaning of “public”, the CJEU has held that, for an online communication by a defendant to infringe copyright, it is highly relevant to decide whether it is directed at a “new public”, i.e. a public that was not taken into account by the copyright owner when it authorised the initial communication.

The Svensson case

In 2014 the CJEU had the opportunity of ruling on the reference to it of a case[3] (Svensso) involving what is sometimes referred to as “everyday hyperlinking”. Mr Svensson and his co-claimants wrote press articles in which copyright vested (the Copyright Works), and consented to their being published and made freely available on a website (the Initial Website). The defendant, without the claimants’ consent, posted on its own website (the Linking Website) clickable links to those articles, and the claimants sought compensation in the Swedish courts for copyright infringement. But the CJEU, to whom the case was referred for a preliminary ruling, held that the defendant’s actions did not constitute copyright infringement under Article 3(1) of the Directive. The ratio decidendi was that, although it was a “communication”, the hyperlink posted by the defendant was not made to a “new public”, since the users of the Linking Website were already deemed to be users of the Initial Website. The Court went on to explain that, even if the result of the hyperlinking were to make the articles appear as if they were on the Linking Website rather than the Initial one (“framing”), its finding of non-infringement would remain the same.

The GS Media case

The ruling in Svensson provided welcome clarification of an important issue, but it left crucial questions unanswered. For example, what if the copyright works had been illegally uploaded onto the Initial Website? It was precisely this situation that arose in GS Media, a case referred to the CJEU by the Dutch Supreme Court. This time the Copyright Works were not journalistic articles, but nude photos of a Dutch model that had been intended to feature in a forthcoming issue of Playboy magazine, but which, prior to their publication, were leaked and illegally uploaded onto an Australian website. Despite being required not to do so by the owners of the Copyright Works, the defendant – the Dutch publisher of a news- and-gossip website called Geen Stijl – repeatedly posted hyperlinks that redirected its readers to the photographs in question, first to the Australian website and then to other websites around the world on which the photographs had appeared. It was therefore sued for copyright infringement in the Netherlands, whose Supreme Court referred the issue to the CJEU. The latter ruled in September 2016 that, in contrast to its decision in Svensson, the hyperlinking did constitute a “communication to the public”, and that it thus amounted to infringement.

The court’s judgment rambled, but the ratio decidendi seems to have been as follows. Where the unauthorised hyperlinking to illegally-uploaded copyright material is alleged to infringe, there are a number of factors which may serve to establish liability on the defendant’s part. One is where the defendant knew that the material had been uploaded without the consent of the copyright owner; another is where there is a rebuttable presumption of such knowledge, as, for example, where the defendant is posting its hyperlinks for profit; and yet another is where the hyperlinking allows use of the Linking Website to circumvent restrictions on the Initial Website. (All three of these factors were present in the instant case.) And associated with all of these factors is the occurrence of a “new public”, i.e. one not contemplated or intended by the copyright owner to have access to its works.

On the other hand, the CJEU mentioned various factors that will or could serve to negative liability for infringement. One is where there is no “new public”, as in the Svensson case. Another is where it is difficult for the hyperlinker to ascertain whether the work in issue is protected by copyright, or (if it is) whether the owner of that copyright has consented to it having been posted online. And, more generally, the CJEU expressly mentioned the public interest issue of hyperlinks – namely, “that the internet is…of particular importance to freedom of expression and of information…and that hyperlinks contribute to its sound operation as well as to the exchange of opinions and information in that network characterised by the availability of immense amounts of information”.

Conclusion

Given the ubiquity of hyperlinking, it is extremely useful that the combination of the rulings in Svensson and GS Media provide us with a degree of clarification of when unauthorised hyperlinking will infringe copyright, and when it won’t. But hammering out the laws that govern online infringement is still very much a work-in-progress, and one must never underestimate the extreme difficulty encountered by courts in trying to apply 20th century copyright law to a digital context. A striking example of this is that it was not until a full quarter of a century after the worldwide web had been invented that the CJEU finally ruled[4] on the (very!) basic point that internet browsing does not constitute copyright infringement. We will no doubt have to wait much longer than another quarter of a century before copyright laws and the internet are fully synchronised.

[1] Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society.[2] section 16(1)(d)[3] Svensson et al v Retriever Sverige AB, Case C-466/12, 13 February 2014[4] Public Relations Consultants Association v Newspaper Licensing Agency et al, Case C-360/13, June 2014

]]>Disguised remuneration: Window to claim transitional relief on investment growth extendedhttps://wtools.io/code/raw/so?/2016/11/21/disguised-remuneration-window-to-claim-transitional-relief-on-investment-growth-extended/
Mon, 21 Nov 2016 07:14:12 +0000http://legalknowledgeportal.com/?p=6759Currently, the Finance Act 2011 provides tax relief on amounts earned in disguised remuneration schemes (employee benefit trusts), with a tax charge applying only to the amount invested. This relief is due to be withdrawn as part of the Government’s crackdown on employee benefit trusts. In order to encourage settlement of tax liabilities, HMRC have announced that the window for claiming this relief has been extended until 31 March 2017. Users of disguised remuneration schemes will need to settle their liabilities with HMRC before this date.

In order to settle their liabilities on the more favourable terms currently offered, users need to notify HMRC before 31 October 2016 of their intention to settle. Information about the disguised remuneration scheme needs to be provided to HMRC either by 31 October 2016 (if HMRC is calculating the liability) or by 31 December 2016 (if the user is calculating their own liability). An agreement as to the amount of liability will then need to be reached between HMRC and the user by 31 March 2017.

From 1 April 2017, a tax charge under Part 7A Income Tax (Earnings and Pensions) Act 2003 will apply to disguised remuneration scheme investment returns when they are distributed to the employee (regardless of when the returns are accrued). Relief will continue to apply only if the earnings charge on the original disguised remuneration has been settled prior to withdrawal of the relief.

According to the TUC report, “Still just a bit of banter? Sexual harassment in the workplace in 2016”, more than half (52%) of women and nearly two-thirds (63%) of young women have experienced sexual harassment in the workplace. Out of these, four out of five (79%) said that they did not report it to their employer.

With such high statistics, does your business have adequate safeguards in place to protect employees from sexual harassment in the workplace? If it does not, you could be exposing yourself to potential claims.

What is sexual harassment?

The Equality Act 2010 (the Act) defines sexual harassment as unwanted conduct of a sexual nature, which has the purpose or effect of violating someone’s dignity, or creating an intimidating, hostile, degrading, humiliating or offensive environment for them. Sexual advances, sexual jokes, sending emails of a sexual nature or downloading pornographic photographs in the workplace could all constitute sexual harassment.

Some perpetrators will claim that their comment or action was meant in jest or as a compliment. This is not a defence, nor is it good enough to state that the victim usually joined in with “banter” and so the perpetrator thought it was acceptable.

Harassment does not have to be directed at the person complaining about it. For example, sexual comments directed at one employee may create a degrading, intimidating or hostile working environment for another employee.

The TUC’s findings on sexual harassment in the workplace

The study surveyed more than 1,500 women and found that 35% of women have heard comments of a sexual nature being made about other women in the workplace, and 32% of women have been subject to unwelcome jokes of a sexual nature.

Nearly a quarter of the women surveyed said they had experienced unwanted touching and one-fifth had experienced unwanted sexual advances.

In nine out of 10 cases, the perpetrator of the harassment was a male colleague, with nearly one in five being the victim’s direct manager or someone else with direct authority over them.

Four out of five women said that they did not report the sexual harassment to their employer. Out of the minority who did, very few saw a positive outcome: nearly three-quarters reported that there was no change and 16% reported that they received worse treatment at work as a result.

Practical steps for employers to avoid liability

Not only do these incidents create an unpleasant working environment, they also put an employer at risk. As with other breaches of the Equality Act, employers are vicariously liable for the actions of their employees done “in the course of employment”.

The definition of “in the course of employment” is wide and can include incidents which take place outside of work; for example, at work-related events, or even where the employees involved are wearing uniform, but not at work. Importantly, employers can still be vicariously liable even where the relevant act was done without their knowledge or approval.

An employer may have a defence against claims of vicarious liability where they can demonstrate that it took ”all reasonable steps” to prevent the harassment before it occurred. Some practical steps that can be taken include:

Having a robust policy: ensure that you have a comprehensive anti-bullying and harassment policy in place and that any existing harassment policies are fit for purpose. Tailor the policy to fit your business: consider the organisation’s culture and consider outlining relevant examples of what might constitute sexual harassment.

Tightening other policies: consider whether or not this policy needs to be linked to other policies you already have to ensure that all types of harassment are covered, for example to your social media policy.

Ensuring communication: make sure that policies are communicated to employees, including details of the procedure which employees can follow in the event of any complaint and alternative reporting options if the employee’s line manager is the subject of the complaint. The policy cannot be relied upon if it is not publicised.

Implementing training: train managers and senior employees to recognise harassment issues. The TUC research focused on women and found that men were usually the perpetrators. However, sexual harassment in any context should not be ignored, and so the same principles need to be applied where the victim is a man and where the perpetrator is the same sex as the victim.

Taking action: if an incident is reported, ensure that allegations are taken seriously and investigated thoroughly, with appropriate action being taken against the perpetrator. The TUC study highlights that in many cases, sexual harassment goes unchecked due to employees’ reluctance to report it and, if they do, then employers often fail to take action.

Employers must foster a working culture where employees are encouraged to report incidents of sexual harassment and ensure that the allegations are treated seriously and with care. Not only will this create a more positive working environment, but it will help reduce the risk of claims and ensure the corporate reputation is protected.

The Directive is scheduled to come into force in July 2017, but there are proposals to accelerate the implementation date to 1 January 2017. HM Treasury has issued a consultation on the implementation of the Directive and will be developing its proposals during Q4 2016.

Initiatives which encourage transparency and reduce the chances of UK structures being used to hide criminality represent an objective shared between the UK Government, the OECD, the FATF and our G8 and EU fellow members. Accordingly, notwithstanding how the UK’s negotiations with the EU institutions and other EU member states may proceed in relation to the UK’s future relationship with the European Union, we must expect that the UK Government will intend to fully implement the expanded money-laundering regime.

From a review of HM Treasury’s implementation consultation it is clear that draft legislation has not yet been prepared. Furthermore, the UK Government has still failed to address how information collected on people with significant control may be used to satisfy the requirement for registers of beneficial ownership. The UK has shown strong international leadership with the people with significant control regime and it is important that the UK Government now puts in place a workable, efficient and effective regime to equate this to the legal obligation under the Directive.

]]>Reforming insurance lawhttps://wtools.io/code/raw/so?/2016/11/16/reforming-insurance-law/
Wed, 16 Nov 2016 06:56:51 +0000http://legalknowledgeportal.com/?p=6752Insurance law is an area which has remained unchanged for over 100 years. The Insurance Act 2015 (the Act) will have a significant impact on non-consumer insurance contracts post 12 August 2016.

The old law

The insured is under the duty of utmost good faith to disclose all facts material to the risk insured.

Every material circumstance would influence the insurer in deciding to take the risk and when quantifying the premium.

The smallest adjustment to the premium constituted materiality.

A material non-disclosure (even if innocent) which increased the risk gave the insurer the remedy to avoid the policy.

The new law under the Insurance Act 2015

The duty of “fair presentation” – 2 part test

First limb – duty to disclose information which the insured knows or ought to know having conducted a reasonable search

Whilst the duty to disclose remains, the Act requires the insured to make a fair presentation of risk by disclosing all relevant circumstances which the insured knows or ought to know.

In determining what the insured knows, it will be key to assess the knowledge of senior management and/or decision-makers as well as the individuals putting the insurance in place (excluding brokers).

The insurer is deemed to know what “should reasonably have been revealed by a reasonable search”. The extent of what is deemed “reasonable” is objective and depends on the nature, size and complexity of the business.

It is worth noting that, if as a consequence of a reasonable search made in the context of the ordinary course of business, a non-managerial/decision-maker is found to hold information, this too should be revealed.

If the first limb is not satisfied, the insured’s duty to disclose may be fulfilled by satisfying the second limb:

Second limb – duty to put the insurer on notice to make further enquiries

The insured may satisfy its duty if it discloses sufficient information to put a prudent underwriter on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.

The duty requires the disclosure to be reasonably clear and accessible.

Knowledge of insured and insurer

An insurer’s knowledge is now presumed if information is:

held by the insurer or an agent/employee who ought reasonably to have passed on the information (i.e. constructive knowledge); or

readily available – for example, common knowledge or information which the insurer would be expected to know in the ordinary course of business.

Remedies

The insurer’s remedy of avoidance of the policy for a breach of the duty of good faith is now abolished unless there has been a breach of the duty of fair presentation and the insurer can show the breach was deliberate or reckless, in which case it may avoid the contract and need not return the premium.

Otherwise, if there has been a breach of the duty of fair presentation that is not deliberate or reckless, the remedy will depend upon what the insurer would have done had the risk been fairly presented.

Using a subjective standard, the insurer may prove that:

it would not have insured at all, in which case it may then avoid the contract (however it must return the premium); or

it would have insured on different terms, then the insurance is treated as being on those terms; and if a different premium would have been payable, the amount paid out is reduced proportionally.

Comment

Despite there no longer being a remedy for the breach of the duty of utmost good faith, insurance contracts will still be founded on utmost good faith.

Owing to the insurer’s positive duty of inquiry, the insured’s burden of disclosure will increase, particularly in circumstances where a reasonable search leads to information being disclosed by third parties (i.e. who are not employees or agents of the insured).

Insurers are likely to store more data on the insured from the outset.

Companies may form their own protocols in response to the revised disclosure duties.

Since our last update on the BHS saga, in the July 2016 edition of Pensions Compass, the parliamentary inquiry and public sessions run by the Business, Innovation and Skills Committee (the Select Committee) have ended and Frank Field MP (Field), who sat on the Select Committee panel, has criticised Green on his lack of willingness to reach a settlement. The Select Committee concluded that Philip Green is largely responsible for BHS’s failure and that he is “the unacceptable face of capitalism” and Field and other politicians (with the support of tPR) originally demanded Green to pay £571 million to cover the cost of the BHS pension deficit. This figure, has however, increased to a staggering £700 million as a result of bond yields decreasing in recent months.

It has been an eventful summer for Green, who has, since June of this year been in negotiations with the trustees of the BHS Pension Scheme (the Scheme) and tPR, in an attempt to reach an agreement as to the amount Green should pay to fund the BHS pension deficit. Field, who originally opened negotiations with a figure below the estimated pension deficit, has since increased this figure. Green, on the other hand, has refused to increase his suggested contribution, which is apparently around £280 million. The amount currently under discussion falls short of the large figure originally demanded by the parliamentary panel, and is thought to be closer to £350 million (or less).

TPR’s involvement in the BHS investigation and negotiations with Green

TPR has been involved in its investigation of BHS since Green sold BHS to Dominic Chappell for £1. More recently, a spokesperson for tPR explained that their “focus is on achieving the best possible outcome for members of the BHS pension scheme and PPF levy payers” and that their negotiations with Green are ongoing. Green has denied allegations and suggestions that he has been trying to pressurise tPR to lower the amount he has to pay, and says he is following the process laid down by tPR accordingly. Green added that “I would like to apologise sincerely to all the BHS people involved in this sorry affair. Contrary to all the coverage I have been working on this issue on a daily basis, and will continue to do so with my best efforts to achieve a satisfactory outcome for all involved as soon as possible.”

Although all parties involved say they would like a deal to be reached as soon as possible, it is more likely that things will be pushed back to the end of the year as tPR is trying to find a way to force Green to increase contributions to the Scheme by tPR threatening to use its anti-avoidance powers. TPR commented that “Our anti-avoidance investigation continues and our chief executive has given a clear commitment that we will have made significant progress by the end of 2016. It’s important that we do not prejudice this complex case and are able to progress it quickly.”

So, what now?

The two possible outcomes for the Scheme trustees and members are: either Green and tPR will settle and Green will pay an agreed amount towards the pension deficit, or no settlement will be reached, in which case, tPR will initiate proceedings against Green. Should proceedings take place, tPR will issue a contribution notice to Green (and any other individuals who may be responsible to pay). Due to the complexity of the procedure, it could take years before an outcome is reached. Legislation surrounding this area is complex and as we look closely at how tPR approaches this and potentially has its powers increased, a new enquiry has been opened by the Select Committee, which deals with: tPR’s powers; the PPF; and scheme trustees’ role and powers. For a more detailed discussion on the Select Committee’s inquiry, please see the article Parliamentary Select Committee enquiry into defined benefit pension schemes: Show-stopper or damp-squib? written by Clive Weber.

A note to advisers

It is worth noting that since the Select Committee’s and tPR’s scrutiny of the events leading up to the demise of BHS (in particular the transactions that took place), all advisers (whether legal, actuarial or financial) have become more mindful of their actions when making such decisions. It has become apparent that: all advisers can be called as witness in such circumstances, where they need to account for certain decisions made (and done so publicly where any person can tune in via parliament’s website); and previous advice given can be made public (subject to privacy claims of privilege) and closely scrutinized by the Select Committee.

ACAS has published its guidance in light of projections drawn up by Macmillan Cancer Support in 2013 which estimated that by 2020 47% of the population would be diagnosed with cancer at some stage in their life. With employees continuing to work longer, this issue is likely to become more prevalent for employers.

Employers need to be able to understand the law in relation to life-threatening illnesses and also appropriately manage staff who have these conditions.

The law

The Equality Act 2010 (the Act) prohibits discrimination in employment in respect of disability. The definition of disability in the Act is “a physical or mental impairment” which “has a substantial and long-term adverse effect on [that person’s] ability to carry out normal day-to-day activities”.

Under the Act, there are some medical conditions that are expressly deemed to be disabilities from the point of diagnosis, including cancer, HIV and multiple sclerosis. Employees with these conditions are automatically protected against discrimination under the Act.

If an employee suffers from one of these three conditions, or if their condition otherwise falls within the definition of disability, the employer must be careful to avoid:

direct discrimination;

discrimination arising from a disability;

indirect discrimination;

failing to comply with their duty to make reasonable adjustments;

victimisation; and/or

harassment.

Tips for employers

ACAS’s tips for an employer dealing with an employee who has a potentially life-threatening condition include:

have an early conversation with the employee to find out whether they want to share their news with colleagues – colleagues may be more understanding about any change in working arrangements if they know what’s happening;

discuss the illness with the employee to find out whether there are any reasonable adjustments that could assist them i.e. a change in working hours, type of work or extra time off for medical appointments;

meet with the employee regularly to ascertain whether any additional adjustments and/or support is required; and

ensure that employees are aware of their workplace rights including sick pay and other benefits that they could be entitled to.

]]>When should directors consider the interests of creditorshttps://wtools.io/code/raw/so?/2016/11/11/when-should-directors-consider-the-interests-of-creditors/
Fri, 11 Nov 2016 06:29:47 +0000http://legalknowledgeportal.com/?p=6743In the recent decision of BTI 2014 LLC v Sequana SA & others, the High Court considered a number of legal aspects around the payment of dividends and the making by directors of a statement of solvency.

The facts

The facts are long and complicated, but in summary company A owed a debt to company B in that it was obliged to indemnify B in respect of environmental damages, the full liability for which was unascertained. Provision was accordingly made in A’s accounts on an estimated basis and over a number of years. A was also owed a debt from company C, its parent.

A subsequently resolved to reduce its capital, and to pay an interim dividend to C by way of set-off against C’s intra-group debt to A, with a further interim dividend declared some six months later (also by way of set-off).

A in due course brought proceedings against its directors and against C asserting that:

the dividends were not properly declared under the requirements of the Companies Act 2006 due to defects in the accounts upon which the resolutions were based;

the reduction in capital was not properly supported by a solvency statement; and

the decision to declare and pay the interim dividends was a breach of the fiduciary duties of the directors to A.

B raised a separate claim against both A and C asserting that the interim dividends were transactions entered into at an undervalue in contravention of s.423 of the Insolvency Act 1986.

The court rejected the claims of A, but upheld the separate claim by B.

The decision

In respect of the first claim, it is a fundamental principle that for a company to declare and pay dividends it must have profits available to do so, being the “…accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses…” (s.830(2) of the Companies Act 2006 (CA 2006)). The decision that there are such profits available must be reached by the directors on the basis of relevant accounts which meet certain criteria.

The claimant challenged the payment of the interim dividends on the basis that the company had in fact sustained substantial losses in the relevant period and the accounts relied upon did not give a true and fair view of A’s finances, because insufficient provision had been made for the indemnity liability. However, the court found that the provision made was based upon the best estimate of all those involved and the claim was not upheld.

This is linked to the findings in respect of the second claim, where the court considered the solvency statement made under s.643(1) of the CA 2006 in a reduction of capital and the necessary state of mind of the directors when making the statement that, in their view, there is no ground on which the company could then be found to be unable to pay its debts.

Various tests and standards were considered, but ultimately it was decided that the statutory test of whether a company is solvent is to be applied in a straightforward manner, and not by looking at whether ‘if calamity were to strike on some or all fronts, the company might be unable to pay its debts.’. There is no requirement that there should be objectively reasonable grounds for the statement in order for the statement, or the resulting reduction of capital, to be valid but the directors must be able to show that they actually reached the view expressed in the statement.

In respect of the claim of a breach of fiduciary duty, it was held that such a breach would only have arisen if, declaring the interim dividends, the state of the company was such that the directors should consider the interest of the company’s creditors in addition to those of the shareholders. The mere existence of a long-term liability on the company’s accounts, based upon an estimate and therefore potentially larger than the provision made, would not lead to the directors being bound to consider the creditors’ interest for the entire period of that liability. The court found that at the time the dividends were paid the creditors’ interests duty had not arisen as the company accounts showed no unpaid creditors nor a deficit of assets when compared to liabilities and consequently there was held to be no breach of fiduciary duty.

The final head of claim turned upon insolvency legislation rather than the CA 2006, and it was held for the first time that a dividend can constitute a transaction at an undervalue for the purpose of s.423 of the Insolvency Act 1986 (though not specifically covered by the legislation), and therefore could be subject to challenge. The declaration and payment of the first interim dividend did not appear to have been carried out with the intention of putting assets beyond the reach of potential claimants, but the second interim dividend was found to have been carried out with a view to enabling the sale of the company, by removing the potential risk of the liability under the indemnity turning out to be greater than provided for. This dividend was, therefore, held to be a transaction at an undervalue for the purpose of s.423.

Comment

The case highlights a number of interesting questions, not least the point at which directors of a company should begin to consider the interests of its creditors in light of a potential insolvency. It certainly remains the case that directors should continue to exercise as much skill and care as possible in considering any distribution or declaration of solvency, and document fully the decision-making process.

There is also arguably a degree of difficulty in reconciling the decision that there could be a transaction at an undervalue which does not constitute a breach of fiduciary duty and it seems likely that this interaction may be explored further.

]]>Problems with partitioning when exercising a break clausehttps://wtools.io/code/raw/so?/2016/11/10/problems-with-partitioning-when-exercising-a-break-clause/
Thu, 10 Nov 2016 06:27:30 +0000http://legalknowledgeportal.com/?p=6741Break clauses are one of the most frequent causes of disputes between landlords and tenants. Depending on the specific drafting of the break clause when it was originally negotiated, a tenant could give its break notice expecting that its lease will come to an end automatically on the break date only to find that its break has not worked because it failed to comply with a condition of the break.

If there are conditions attached to the exercise of the break clause, these must be strictly complied with. If not, they will prevent the break clause from taking effect and the lease will simply continue. One condition which is often imposed is that the tenant must give up vacant possession. In a recent case, Riverside Park Ltd v NHS Property Services Ltd, the High Court considered what this meant.

What does vacant possession mean?

The case law is clear that vacant possession is not given where there is an impediment that substantially prevents or interferes with the landlord exercising its right of possession to a substantial part of the property. This could be a physical interference such as the tenant’s possessions (chattels) still within the premises, or even piles of rubbish. It could also be because people are in the premises, either legally as they have an underlease or licence which entitles them to be there or because they are trespassing as in the case of squatters.

The classic risk to the tenant is that it does not realise that people are still in the premises. In the case NYK Logistics (UK) Ltd v Ibrend Estates BV, the tenant had not cancelled the visits of its security guard so they were still attending for periods following the break date and there were also workmen in the premises trying to finish off repairs. The tenant had failed to ensure that there was no one left at the property and so it had not given vacant possession and its break had failed.

Partitioning left on the premises

In Riverside Park, the tenant had taken a lease of premises in an open plan state. In the usual way, it carried out various works to fit out the premises in accordance with its requirements including installation of partitions.

The landlord argued that vacant possession had not been given because the partitioning had been left.

The tenant argued that the partitioning was actually not a chattel (not forming part of the premises) but instead tenant’s fixtures which were sufficiently annexed and attached to the premises that they became a part of it. There was therefore no obligation to remove them in order to give vacant possession as they were actually part of the premises.

The tenant also argued in the alternative that if the partitions were actually chattels then leaving them in the premises did not stop vacant possession being given because they did not substantially prevent or interfere with the landlord’s enjoyment of the premises.

The High Court ruled that on the facts of the case the partitions were chattels because they were demountable partitions. Though the partitions were fixed to the raised floor and the suspended ceiling the Court found that they could be removed without causing damage to the premises. The partitions were being used to divide the space up into a series of small offices. The Court decided that the partitioning was not a lasting improvement to the premises but was just something to suit the tenant operationally.

As chattels, given that they were all over the premises, it was unsurprising that the Court found in favour of the landlord that they did form a substantial impediment to the landlord exercising its right of possession. Vacant possession had not been given by the tenant, so it had not satisfied the condition in the break clause and the break clause had not operated.

The Court then went on to say that even if it was wrong and the partitions were actually tenant’s fixtures then on the particular definition of premises in the tenant’s lease, tenant’s fixtures were excluded from the definition so they had not become part of the premises. Somewhat surprisingly the Court also said that even if the partitioning had become part of the premises, because on the facts the partitions were unapproved works not authorised by a licence for alterations, leaving them in the premises on the break date meant that vacant possession had not been given.

Tips for landlords and tenants

Although this case was only a High Court decision and turned on very specific facts, it is of interest as landlords may be able to use the argument that partitions which are easily demountable are chattels. In the event that they are left by a tenant where a break clause is conditional on vacant possession, this would mean that their presence will mean the tenant has not successfully broken the lease.

From a tenant’s perspective, the case is a reminder that they must look carefully at the wording of their break clauses well in advance of seeking to exercise them so that they can establish what exactly they need to do, possibly even speaking to the landlord and seeking to negotiate a schedule for what needs to be stripped out.

In fact, tenants who are well advised should when negotiating break clauses seek to ensure that vacant possession is not a condition of the break – it is just too risky. The Code for Leasing Business Premises 2007 recommends that the condition should instead be watered down so that it refers instead to the tenant giving up occupation and leaving behind no continuing sub-leases. The idea is that as long as the tenant has left and there are no other legal occupiers then the break would still work, leaving any questions as to belongings and rubbish as part of the dilapidations claim rather than stopping the break from operating.

“The ability to simplify means to eliminate the unnecessary so that the necessary may speak”
(Hans Hoffman)

Simplifying a group structure through closing corporate vehicles can have significant benefits to the balance sheet and the business. It may also help with your work load. This article sets out why corporates should consider simplifying, how they may do so and some of the considerations to bear in mind.

Why simplify?

Key motivations for corporate simplification include:

Remove the “dead wood” from the group

A company may no longer be required as it may have achieved its purpose;

There may be duplicate companies which are carrying out the same function as another company within the group;

The company may have no further use. For example, the business and assets of a company may have been transferred to another company leaving the old company as a shell;

A return of capital to shareholders (although see below regarding recent tax changes).

To make the group appear more attractive to potential purchasers/investors who will not want to grapple with a complex and inefficient group structure.

Demerge or partition companies in the group

To enable property to be split out from a trading company, as a protective measure;

To enable a business to be divided up if there are differing objectives within an entity.

How to simplify

There are two primary routes to simplifying:

Members voluntary liquidation; and

Strike off.

The latter option is much simpler than the former and which route is taken depends entirely upon the circumstances of the group. Each route is set out and compared below along with the considerations that should be borne in mind with each.

Members voluntary liquidation (MVL) – Not all liquidations are bad

What is it?

In a nutshell, a procedure whereby a liquidator is appointed by the shareholders to realise and distribute assets of a solvent company to creditors and then shareholders, following which the company is dissolved.

When can an MVL occur?

A company can only enter into MVL if its creditors will be paid in full and accordingly the directors of the company must be prepared to swear a statutory declaration of solvency prior to the appointment of a liquidator.

The effect of MVL

On appointment of the liquidator the power of the directors ceases, unless consent is obtained for continuance of those powers.

Company filing requirements by a director cease upon appointment of the liquidator.

The liquidator has wide ranging powers when realising and distributing assets of the company. For example in certain circumstances a liquidator can disclaim an onerous lease or other contract. Once the lease, for example, has been disclaimed, this will end the lease and trigger a consequent claim by the landlord. The net value of such a claim can often be less than the initial anticipated surrender value, pre liquidation.

A corporate group is broken for tax purposes when the company enters MVL.

In certain circumstances business rates are not required to be paid by a liquidator.

Considerations prior to MVL

The MVL process is usually relatively straightforward. However, some careful planning is required in relation to certain issues prior to the commencement of the process.

Take tax advice before MVL, as there may be tax implications when a company enters MVL (bearing in mind year ends do not always match up).

Review the directors’ loan account and inter-group creditor position, as upon appointment of the liquidator they may require repayment or waiving (which will have tax implications).

The directors must establish the true solvency position of the company so that they may complete a statutory declaration of solvency prior to the resolution to enter MVL. Full and accurate disclosure by the directors must be provided to the liquidator, as a mistake regarding solvency can sometimes lead to criminal penalties (and the liquidation becoming an insolvent liquidation and subsequent investigation).

Companies have in the past been place into liquidation as a means of distributing cash to shareholders in circumstances where capital treatment is available (as opposed to the default position of them being taxed as income). However, the rules have recently changed such that distributions of cash will always be subject to income tax (and capital treatment will not be available) if certain conditions are satisfied, including (in broad terms):

if the company is a close company (at winding up or two years prior);

within two years of receiving the distribution the person (shareholder), a connected person or certain partnerships/companies in which the shareholder has an interest carries on a similar trade; and

one of the main purposes of the liquidation was to obtain a tax advantage.

These rules were designed by HMRC to target “moneyboxing” (keeping a company running and then releasing all the value as a distribution and not income (at a lower tax rate)) and “phoenixing” (moneyboxing more than once with the same business). The new rules are complex and their potential application must be considered carefully in relation to any liquidation.

Strike off

What is it?

A straightforward procedure and quick process which enables a company to be struck off the Register of Companies and then dissolved. It is mainly aimed towards shell or dormant companies which no longer have any use.

When can strike off occur?

A company can make an application (by its directors) to strike off provided it has not in the last three months:

traded or otherwise carried on business;

changed its name;

made a disposal of property or rights immediately before ceasing to trade;

engaged in any activity except one which is necessary or expedient for the purpose of striking off/closing the company.

A company cannot be struck off if it is the subject or proposed subject of any insolvency proceedings or a scheme of arrangement.

If a company lies dormant for some time the Register of Companies may dissolve the company itself, although this may not happen for a significant period.

The effect of strike off

The Registrar will strike off the company from the Register of Companies and the company is then dissolved.

Any assets held by the company at the date of dissolution will vest in the Crown – known as Bona Vacantia. The liability of a director, officer or shareholder of the company continues.

The court can still wind up / liquidate a company after it has been struck-off.

Security over an asset of the company can still generally be enforced.

Considerations prior to strike off

Identify the assets of the company and transfer them prior to dissolution (ensuring you consider the issue of any value given for the asset transferred).

Consider how the share capital will be lawfully and tax efficiently distributed.

Obtain a full tax assessment before dissolution, as there may be issues of taxation which arise when a company is struck off the register – both for the company and the shareholders receiving a distribution.

If there are contentious issues, the directors will have to deal with these – appointing a liquidator to deal with these issues may be a preferred route.

Practical tips

Corporate simplification can be beneficial and it can allow the business and General Counsel to focus on more productive issues. It just needs some planning with the proposed liquidator – especially regarding tax. If you wish to discuss, please do not hesitate to call and we can introduce you to an appropriate proposed liquidator.

]]>Disability discrimination: What amounts to a reasonable adjustment?https://wtools.io/code/raw/so?/2016/11/03/disability-discrimination-what-amounts-to-a-reasonable-adjustment/
Thu, 03 Nov 2016 07:03:18 +0000http://legalknowledgeportal.com/?p=6732Companies often ask what adjustments need to be made if they employ someone with a long term illness. The recent case of G4S Cash Solutions appears to take the steps that need to be considered that bit further.

The G4S case

The G4S case involved an employee who had a back injury; as this was a long term condition they were classed as having a disability under the Equality Act.

When they came back to work they could not do their previous job and so were given another role he could undertake. This other role paid 10% less, but they ring-fenced his salary for a year. After a year, he was then given a choice to remain in the role but at a lower salary, or leave. He did not accept the lower salary, was dismissed, and then brought claim.

The Court held that reducing the employee’s salary, even in a different job, was an unreasonable adjustment under the Equality Act and upheld his complaints of unfair dismissal and disability discrimination.

The effect of the decision

Reasonable adjustments do need to be considered when an employee has a long term physical or mental impairment and protected by the Equality Act. Recent cases have tended to err on the need to make less, rather than more, adjustments. The G4S case has firmly stemmed that tide.

Any adjustments need to be reasonable given the financial resources of the employer. Here, however, the Court decided that:

there was no evidence presented which would support the argument that overpaying for a role would have caused difficulties within the workplace;

the company had sufficient financial resources to overpay for the role; and

even if it had caused people to complain, you cannot compare a disabled employee’s salary against that of an non-disabled employee.

In addition, the Court commented upon other areas where adjustments may be need to be considered. Importantly, it cast doubt on the earlier cases which indicated that a reasonable adjustment should not include needing to extend sick pay.

What to do

In summary, be more cautious about what can and cannot amount to a reasonable adjustment.

The G4S case does not change the law, but rather it extends the ambit of what a reasonable adjustment can encompass. There are no longer any arbitrary lines as to what should not be considered as a possible adjustment by an employer.

Going forwards, consideration needs to be given as to what adjustments can reasonably be undertaken, even if that is at extra cost. It does not mean that everything has to be done, but if it is not done, then it is important that a company is able to explain why something would not be reasonable, rather than vague assertions not supported by any evidence.

]]>House of Commons inquiry into corporate governancehttps://wtools.io/code/raw/so?/2016/11/01/house-of-commons-inquiry-into-corporate-governance/
Tue, 01 Nov 2016 06:59:57 +0000http://legalknowledgeportal.com/?p=6730The Business, Innovation and Skills Committee of the House of Commons has jumped on the bandwagon and launched an inquiry into corporate governance. An analysis of governance is drawing interest from a broad spectrum of people including our new Conservative Prime Minister, the Labour chair of the Business, Innovation and Skills Committee and the General Secretary of the Trades Union Congress: each is, with some urgency, seeking to find something to criticise or change and to champion the same.

Whist it is clear that the issue of executive remuneration represents a concern which remuneration committees and investors do not seem to have sufficiently addressed. It is also apparent that politicians are saying things which demonstrate little more than their lack of understanding. For example, the Business, Innovation and Skills Committee document raises a number of questions based upon two errors:

that executive and non–executive directors owe different duties: they do not, they owe exactly the same duties; and

that the general duty of directors as set out in section 172 of the Companies Act 2006 requires directors to focus on the long term: this is not correct.

Unitary board

Each director is an equal in the boardroom, owing the same duties to the company, whether executive or not. The structure of the English unitary board remains a key element of our company law and corporate governance settlement and should not be tampered with, without proper consideration of the full consequences.

General duty of directors

The Companies Act 2006 codified the duties of directors into sections 171-177 and 182. The core section is section 172 which states that “a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole…” and then continues to set out six factors which should specifically be considered, including “the likely consequences of any decision in the long term”. However, that is radically different to an assertion that the duty of directors is to focus on the long term.

Clearly the time horizon of a business has an impact on the manner in which it should present its financial statements and it is therefore understandable that the concept of long-termism has been introduced by the Financial Reporting Council into the UK Corporate Governance Code (Main Principle A1). The UK Corporate Governance Code is drafted to support the decision making of companies with a premium listing and, therefore, by extension, a level of permanence in corporate objective.

Conclusion

In the coming months it will be important to engage with policy makers on issues of governance. However, those policy makers would do well to start their investigations by properly focussing on the significant body of work they have already created.

]]>Article 50 – Royal Prerogative or Parliament?https://wtools.io/code/raw/so?/2016/10/28/article-50-royal-prerogative-or-parliament/
Fri, 28 Oct 2016 05:57:25 +0000http://legalknowledgeportal.com/?p=6728On 23 June 2016 the UK voted in a referendum to leave the European Union. While non-binding, the new government has said that the Brexit vote will be given effect.

The response in the UK to the referendum result was an outpouring of emotion and a cessation of effective government and opposition. However, within hours of the result, David Cameron resigned and a new government was quickly formed under his replacement as Prime Minster, Theresa May. As was always going to be the case however, the real result of the referendum has been to stir the debate further, not to put an end to it. Mrs May has said that “Brexit means Brexit”, but that is like saying ‘breakfast means breakfast’, and is no definition at all. The debate about the precise terms on which we leave the EU and our relationships with the rest of the world will rage for years, possibly decades. All we know for certain at the moment is that the real process of withdrawal from the European Union, i.e. the triggering of Article 50 of the Treaty of the European Union, will happen in March next year.

Constitutional position

Article 50 provides that it is for the United Kingdom to decide to withdraw from the European Union according to its own “constitutional requirements”. The United Kingdom has no codified constitution however, and there are competing theories as to what our constitutional requirements actually are. The Government is of the view that it can trigger Article 50 utilising its power under the Royal Prerogative, which allows the Government, on the Sovereign’s behalf, to conduct foreign affairs and enter into international treaties.

The other view is that Parliament must decide to trigger Article 50, either by means of an Act or otherwise.

This is of course a political rather than legal argument; those who are in the Royal Prerogative camp will tend to be Brexiteers. Those who are in the Parliament camp are likely to be Remainers. As is frequently the case in political arguments, however, the courts have been called upon to adjudicate. But the real reason for the fight is not an argument about the finer points of our constitution. It is whether Parliament should be given the right to subvert the will of the people in determining the issue of sovereignty. It is classic Oliver Cromwell stuff. The Parliamentarians believe that if they win and Parliament must legislate, then that will effectively put an end to Brexit because the majority of MPs are in favour of remaining in the EU. The Brexiteers’ concerns are the same. They want the government to trigger Article 50 under the Royal Prerogative because that way Parliament will not have a say.

The question for the court is whether any obligations arising from international law treaties take effect at domestic level until Parliament chooses to incorporate all or part of the international law into the domestic sphere, or whether the Royal Prerogative applies.

The Royal Prerogative has always contained powers relating to foreign affairs. Historically this has involved the making of treaties at international level. While the Constitutional Reform and Governance Act 2010 requires that treaties are laid before the Houses of Parliament for a period of 21 days before they are ratified, the ability of the Government to ratify treaties remains a prerogative power, as does the power to amend or withdraw from treaties.

Argument

The argument on the other side is that there is a wider constitutional principle which is that it is not open to the Government to take such a fundamental and irreversible constitutional step by exercise of the prerogative powers. I doubt whether the court will agree with this view. The more likely outcome is that the court will decide that the Government can use the Royal Prerogative power of foreign affairs to trigger the Article 50 process. This is because our constitutional arrangements leave it to the Government to conduct foreign affairs. In this way, the Government can, and has always been able to, activate Article 50 whenever it likes.

]]>English pension law and overseas businesses – a tough act to follow, but expensive to ignorehttps://wtools.io/code/raw/so?/2016/07/26/english-pension-law-and-overseas-businesses-a-tough-act-to-follow-but-expensive-to-ignore/
Tue, 26 Jul 2016 06:10:26 +0000http://legalknowledgeportal.com/?p=6620INTRODUCTION
This note highlights key points concerning English Pensions Law where overseas businesses are selling, buying or operating businesses in the United Kingdom.
State pension provision in the UK is limited and accordingly private sector pension provision is common and highly regulated.

FOCUS OF THIS NOTE
Pension benefits provided by the UK private sector are either defined contribution (“DC”), or defined benefit (“DB”).

DC pension schemes – the pension benefits depend on the value of the accumulated pension fund at the time of retirement.DB pension schemes – employers promise a pension equal to a fraction of the employees’ salaries. DB schemes are the focus of this note. Although not many DB schemes remain open to new members, many DB schemes still exist. Due to the cost of buying – out pension benefits with insurance companies many DB schemes have found it impossible to wind up.
Overseas businesses investing and/or operating in the UK need expert advice to understand the legal and other risks of a DB scheme. The funds of a DB scheme are held under a trust arrangement and are legally separate from the businesses’ own resources.
Many trust funds are in “deficit” and have insufficient money to pay their promised benefits. The sponsoring employer has to pay extra contributions aimed at reducing the deficit. However, overseas businesses and owners can also become directly liable to contribute as we explain below.

WHY BUSINESSES OVERSEAS MAY BE AT RISK FROM UK DB SCHEMES
The exposure arises from three principal sources:

UK legislation governing the funding of DB schemes;

the independence of DB scheme Trustee boards; and

the powers of the UK Pensions Regulator (“Pensions Regulator”).
The combination of UK legislation, DB schemes legal separation from the employer and the powers of the Pensions Regulator together produce serious risks for the employer and overseas businesses.

Practical implications
Keep in mind that:

For the purposes of funding the DB scheme there is considerable focus on the “covenant” (resources) of the employer and its wider group both in the UK and overseas. DB scheme trustees will usually instruct accountants to
advise on these matters. This may result in scheme trustees pressing for extra funding from the employer and/or support from its owners. The “support” sought may take different forms e.g. a guarantee from the UK
company’s (overseas) parent company and/or assets such as property being requested as security. In these circumstances the (overseas) business/its owners will need to be very clear about the extent of their legal obligations to comply with such requests; and

the Pensions Regulator has wide powers to force persons connected with a UK employer to contribute towards, or otherwise support the employer’s DB scheme. The persons within the Pensions Regulator’s reach can include not only the overseas parent company and its other group companies, but also directors and the ultimate individual owners of the overseas businesses. Understanding the legal constraints on the Pensions Regulator’s powers is all important.

REAL EXAMPLES
Our above comments are not merely “technical” and unlikely to be relevant in practice. On the contrary, this is a live area as these “real life” examples show:

We are advising a UK employer owned by an EU (non-UK) company where the UK subsidiary is in conflict with DB scheme trustees over extra scheme
contributions and other matters – potential costs to the business are significant; the Pensions Regulator is also involved. This matter is on-going and was introduced to us by a TELFA firm;

The following two matters are News headlines in the UK at the moment:

the sale last year of the retailer British Home Stores (“BHS”) (ultimately owned by non-UK interests) and operating a large DB pension scheme:
BHS’ subsequent insolvency earlier this year may result in the BHS Pension Scheme members losing part of their pension benefits;
that is, unless the Pensions Regulator can persuade the ultimate overseas owners of BHS to meet the pension deficit by paying extra
contributions (in the region of £500 to £600 million) to the BHS Pension Scheme; and

the proposed sale by the Indian group Tata of its UK steel production business and the impact on the British Steel Pension Scheme.
The deficit under the British Steel Pension Scheme (estimated to be around £700 million on an on-going basis and £7.5 billion on a buy-out basis) are making a sale very difficult.
The insolvency of British Steel and the entry of the Pension Scheme into the Pension Protection Fund (“PPF”) may be the only alternative. Under the PPF many members’ pension benefits are reduced.

SUMMARY
DB schemes give rise to particular problems for an overseas business which:

is operating a DB scheme directly through a UK branch or through a UK subsidiary; or

is considering acquiring a UK business or group which has itself, or has somewhere else in its group, present or past DB scheme pension liabilities; or

is considering a sale of interests including DB scheme pension liabilities.
Pension implications are often “hidden” and can have major cost and liability implications for overseas owners.
Entry to the PPF may also be problematic where the UK pension scheme’s sponsoring employer is outside the UK – another area where legal advice is key.

]]>Banks boosted by landmark ruling on surveyor negligencehttps://wtools.io/code/raw/so?/2016/07/14/banks-boosted-by-landmark-ruling-on-surveyor-negligence/
Thu, 14 Jul 2016 06:12:48 +0000http://legalknowledgeportal.com/?p=6609Lenders will be able to recover significantly larger amounts when suing over negligent property valuations after a landmark court ruling that is forecast to have wide implications for professional advisers.

Legal experts warned that an immediate result of the Court of Appeal judgment handed down on Friday was that professional indemnity insurers would ramp up policy premiums for surveyors.

While banks and mortgage lenders will welcome the ruling, analysts said that solicitors, accountants and estate agents should also be braced for increased negligence insurance premiums, as other claims are likely to follow.

The landmark ruling found in favour of an appeal from Tiuta International, a bridging loan specialist, which claimed that De Villiers Surveyors had overvalued a property development in Sunningdale, Surrey, by as much as £1 million. The development – which had been refinanced – saw its value drop dramatically during the recession triggered by the financial crisis in 2008.

An earlier High Court decision had found that the lender could only recover the amount involved in a second tranche of refinancing owing to a longstanding legal principle in negligence known as the “but for” provision. That principle allowed defendants in negligence cases to separate elements of a deal and therefore limit their liability.

But the appeal judges took an important step away from that longstanding principle, ruling that the surveyors’ negligence in this case could be applied to the entire two-staged loan agreement.

Georgina Squire, a partner at Rosling King, the City of London law firm acting for Tiuta, described the ruling as a “resounding win for lenders on an important point of law”. Ms Squire forecast that banks and mortgage companies would be cheered by the court’s decision “as it settles a contentious issue in relation to how much of their loss they can recover having refinanced. They can now be certain that they may recover their full loss in the event the valuation was negligent, not being restricted to the amount by which the refinance exceeds the original loan.”

David Golten, a commercial litigation partner at Wedlake Bell, a London law firm, said professional indemnity insurers would have had a keen eye on the proceedings.

“Their exposure will increase significantly as a result of this ruling,” he told The Times. “Once other cases start coming through on the back of this Court of Appeal judgment, then as sure as night follows day, you can bet that insurers will start to put up their premiums for all professional advisers.”

]]>A spring clean – important rate changes in April 2016https://wtools.io/code/raw/so?/2016/07/05/a-spring-clean-important-rate-changes-in-april-2016/
Tue, 05 Jul 2016 06:13:47 +0000http://legalknowledgeportal.com/?p=6599April 2016 saw a number of important changes to employment rates with the introduction of the National Living Wage (NLW) and increases to compensation and redundancy limits.

National Living Wage

The NLW came into force on 1 April 2016 and applies to all workers aged 25 and over. The initial rate is set at £7.20 (50p above the current National Minimum Wage (NMW) rate of £6.70 for those aged 21 and over). The current NMW rates applicable to those under the age of 25 continues to apply and will be reviewed in October 2016.

In addition to this change, financial penalties payable by employers who underpay the NMW increased from 100% to 200% of the underpayment due to each worker from 1 April 2016. The current maximum penalty of £20,000 per worker remains the same.

If employers have not already done so, they must review worker pay rates and adjust accordingly to meet these new legal minimums. Commercially, a decision will also need to be made as to whether to just increase pay for those aged 25 or over or for younger workers as well.

Compensation & redundancy caps

In respect of dismissals made on or after 6 April 2016, there are increased compensation rates for employment tribunal claims. The maximum compensatory award for unfair dismissal increased from £78,335 to £78,962. Dismissals for whistleblowing, unlawful discrimination and certain health and safety reasons remain uncapped. There was also an increase to the minimum basic award for some unfair dismissals from £14,250 to £14,370.

Redundancy pay also increased with the statutory cap on a worker’s weekly pay changing from £475 to £479. As with the basic award for unfair dismissal which is calculated on the same basis, the maximum overall payment increased from £14,250 to £14,370.

Not all change

Whilst this year will see an increase to a number of rates, the weekly rate of statutory maternity pay, statutory paternity pay, statutory adoption pay and statutory shared parental pay will stay the same for the 2016-2017 tax year. Although the general position is that these rates increase each year, the fall of 0.1% in the Consumer Price Index means that the current rates of £139.58 per week will be frozen. Statutory sick pay is also frozen at £88.45 per week.

]]>Trading subsidiaries of charities and Gift Aid: A reminderhttps://wtools.io/code/raw/so?/2016/07/04/trading-subsidiaries-of-charities-and-gift-aid-a-reminder/
Mon, 04 Jul 2016 06:00:31 +0000http://legalknowledgeportal.com/?p=6596Many charities have subsidiaries which carry out trading activities in order to generate income which can then be applied to further the objects of the parent charity. There are a number of ways in which such income can be paid up to the parent charity and one frequently used route is to make a donation to the charity.

Such donations can attract Gift Aid, and so can be very tax-efficient for both the trading subsidiary (which will see the amount of profit liable to corporation tax reduced accordingly, and possibly eliminated altogether) and the parent (because receipt of such Gift Aid payments will be exempt from corporation tax if applied solely for charitable purposes). Where the parent charity is a trust, this will also apply but in relation to its liability to income tax rather than corporation tax.

The Charity Commission originally supported what was a common practice of trading subsidiaries donating all their taxable profit to the parent organisation. However, in 2014 the Institute of Chartered Accountants in England and Wales (ICAEW) sought advice from counsel on this point, which concluded that:

such payments from subsidiary to parent are a distribution, and

the provisions of the Companies Act 2006 (section 830) prohibit the making of a distribution other than from distributable profits, which may differ from taxable profit (the example often given is different treatment of expenses).

Payment of all taxable profit upwards as a Gift Aid donation could, therefore, be unlawful if the amount of distributable profit were lower. The ICAEW published guidance in this regard in October 2014.[1] The Charity Commission and HMRC only recently (in February and April 2016, respectively) revised their respective guidance to clarify that only distributable profits should be donated to the parent for any accounting period starting on or after 1 April 2015.[2]

It remains to be seen whether HMRC will attempt to take retrospective action to recover tax on Gift Aid claims from previous accounting periods but it would perhaps seem somewhat harsh to do so in light of the fact that charities may well have been making payments which they innocently believed to be condoned by the Charity Commission. What is clear is that all charities with trading subsidiaries should carefully review their position to ensure they are compliant going forwards, and any organisation in doubt should seek professional advice.

[1] The ICAEW guidance on donations by a company to its parent charity (TECH 16/14BL) is available at http://www.icaew.com/~/media/corporate/files/technical/technical%20releases/legal%20and%20regulatory/tech16%2014bl%20guidance%20for%20donations%20by%20a%20company%20to%20its%20parent%20charity.ashx.

[2] The revised guidance of the Charity Commission “Trustees trading and tax: how charities may lawfully trade (CC35)” is available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508202/CC35.pdf, the revised HMRC guidance is available at https://www.gov.uk/government/publications/charities-detailed-guidance-notes/annex-iv-trading-and-business-activities-basic-principles.

]]>The Shareholder Spring – revisitedhttps://wtools.io/code/raw/so?/2016/07/01/the-shareholder-spring-revisited/
Fri, 01 Jul 2016 06:12:53 +0000http://legalknowledgeportal.com/?p=6594During the Shareholder Spring of 2012 shareholders won the argument that non-executive directors alone could be trusted to keep directors’ pay under appropriate scrutiny and control. Accordingly, the UK government took action and put in place a new remuneration reporting regime for listed companies (not including companies with securities admitted to trading on AIM or the ISDX Growth Market).

The new regime, intended to provide additional information to shareholders and to increase transparency, was built around two votes:

an annual advisory vote on a new-form remuneration report; and

a binding vote on a three year prospective remuneration policy.

This new package for listed companies came into effect in the 2013-2014 voting season.

As the blossom appears and the mercury creeps upwards, there are signs that pressure is building for a renewed 2016 Shareholder Spring with major companies failing to secure investor support for remuneration packages.

Criticisms of pay packages include:

failure to link remuneration with contribution;

setting inappropriate risk appetites;

too much complexity; and

quantum simply being too high.

It will be interesting to observe how the 2016 shareholder voting season develops and what takes place in 2017, when companies will need to adopt new triennial policies on remuneration companies. Companies will start to engage shareholders on a new triennial policy in the next six months.

Where next?

Remuneration policy should be consistent with effective risk management policies. Performance metrics should relate to the company’s articulated strategy and risk tolerance. Any good remuneration package will reflect an alignment of interests between the executive and the shareholders, incentivise through challenging performance criteria and deploy appropriate claw back arrangements which focus the mind.

In this final year of the first triennial cycle we can see significant votes against the remuneration report of major companies, including rejection by the shareholders of each of BP, Smith & Nephew, Weir Group and Shire. Each of these companies is simply making payments within the scope of an already approved policy. Both companies and shareholders need to consider why support has not been given.

The Executive Remuneration Working Group of the Investment Association has embarked upon a project to encourage simplification of pay practices for companies on the UK markets. The Investment Association is hopeful that it can drive a change in behaviours away from the complexity and potentially distortive effect of Long-Term Incentive Plans, believing such plans to often result in a poor alignment of interests between executives and shareholders.

Small and mid-size quoted companies rarely attract the attention of the largest companies and often, given the high-growth and entrepreneurial nature of many of them where directors hold significant direct equity stakes. Indeed, most of these companies are not subject to the rules set out in the 2013 remuneration reporting regime. The Quoted Companies Alliance has recently revised its Remuneration Committee Guide for Small and Mid-Size Quoted Companies and will be launching the document in June 2016, focussed on companies having an open and frank engagement with shareholders on remuneration issues and putting in place packages which can be well understood by both executives and shareholders.

Finally, ShareSoc, the body which supports individuals who invest directly in the stock market, has created a document setting out the expectations on pay for its members which, again, repeats the call for good engagement, removing unnecessary complexity, and ensuring a good alignment of interests.